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# EC111Class7Answers - UNIVERSITY OF ESSEX DEPARTMENT OF...

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UNIVERSITY OF ESSEX Autumn Term 2011/2012 DEPARTMENT OF ECONOMICS Tim Hatton EC111 Class Exercise 7 Week 9 Outline Answers 1) a If the two firms collude to maximise their joint profits then they act as if they were a single monopolist. From the demand curve we have P = 270 Q and MR = 270 2Q Setting MR = MC gives 270 2Q = 30; Q = 120, If the firms divide output equally then they produce 60 each. From the demand curve P = 150. Industry profit is (P AC)×Q = (150 30)×120 = 14400. P 270 150 30 120 Q MR D MC = AC

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1) b Under Bertrand duopoly, firms compete on price rather than on quantity. They drive the price down to marginal cost. At P = MC we have Q = 270 30; Q = 240. Since P = AC, there are zero profits. 1) c. In a Cournot equilibrium each firm produces its ‘best response’ output, given the other firm’s output. Recall that: If firm A produces nothing, then firm B is essentially the only firm and it will produce the monopoly output. If Firm A produces the perfectly competitive (or Bertrand) industry output then firm B will produce zero.
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EC111Class7Answers - UNIVERSITY OF ESSEX DEPARTMENT OF...

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